Managing in Uncertain Times, Part 3

L. Douglas Mault

April 2009

Why do owners/senior managers make bad decisions and select bad strategies? In this month’s article we will examine four reasons why this happens, and next month we will look at five more reasons.

Underestimating Uncertainty
People routinely underestimate the amount of uncertainty in facts, figures and future outcomes, according to Daniel Kahneman and Amos Tversky in the 1974 book, Judgment under Uncertainty: Heuristics and Biases. This propensity is often seen in strategic and tactical planning exercises. People place unwarranted faith in their, or their teammates’, estimates of current average industry profita-bility, potential competitive reactions or the results of possible courses of action. They fail to consider the real uncertainties of the future and future conditions. There is a tendency to project the past onto the future. Seldom does the future turn out to look anything like the past.

Winning and Losing Streaks
Statisticians and probability theorists know there is no scientific evidence of winning and losing streaks. People often bet their compa-ny’s future on the premise, however illogical, that "we’re on a roll” or "our bad luck is going to change soon.” There is clearly no un-derstanding of probability theories, just a reliance on wishful thinking. Although hunches and gut instinct are part of many decision-making processes, it would be wise not to bet the future of the company on a hunch.

Over-reliance on Selected Information
Anecdotal evidence, especially if it is from a superior or an "expert,” elaborate stories or newly developed information are given much more credibility even if more routine information or generally known data, although less spectacular, are more reliable and relevant to current circumstances. As with urban legends, the more often the anecdote is repeated, especially by a superior or "expert,” the more credible and "reliable” it becomes. Remember—wishing does not make it so. Remember, too, that it is rare for an outsider to know more about your company and industry than you do. Take their input, advice and opinions, but be cautious about accepting it as gospel.

Starting from a Set-point
Research shows that if a result, a target or a finite point is offered as a possibility early in the planning/analysis phase, the final answer is often perilously close to the set-point. What is interesting is that this happens even when participants see the set-point selected by random drawing or even with a roulette wheel. There is much to be said for starting with two set-points at the far reaches of both ends of the possibilities. This does not mean that the answer or solution will be found at the mid-point. That approach must be avoided just as we said last month: The "best/most likely/worst case” scenario is to be avoided.

L. Douglas Mault is president of Executive Advisory Institute, Portland, Ore. The Web site is www.consulteai.com; he can be reached at (888) 428.3331.